Wednesday, December 28, 2011

The French government just doesn’t seem to understand the real implications of the euro, the single currency that France shares with 16 other European Union countries.

French officials have now reacted to the prospect of a credit rating downgrade by lashing out at Britain. The head of the central bank, Christian Noyer, has argued that the rating agencies should begin by downgrading Britain. The finance minister, Francois Baroin, recently declared that, “You’d rather be French than British in economic terms.” And even the French Prime minister, Francois Fillar, noted that Britain had higher debt and larger deficits than France.

French officials apparently don’t recognize the importance of the fact that Britain ... has its own currency, which means that there is no risk that Britain will default on its debt. When interest and principal on British government debt come due, the British government can always create additional pounds to meet those obligations. By contrast,... the French central bank cannot create euros. ... That is why the market treats French bonds as riskier and demands a higher interest rate...

There is a second reason why the British situation is less risky than that of France. Britain can reduce its current-account deficit by causing the British pound to weaken relative to the dollar and the euro, which the French, again, cannot do without their own currency. Indeed, that is precisely what Britain has been doing with its monetary policy: bringing the sterling-euro and sterling-dollar exchange rates down to more competitive levels. ...

France should focus its attention on its domestic fiscal problems and the dire situation of its commercial banks, rather than lashing out at Britain...

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The French government just doesn’t seem to understand the real implications of the euro, the single currency that France shares with 16 other European Union countries.

French officials have now reacted to the prospect of a credit rating downgrade by lashing out at Britain. The head of the central bank, Christian Noyer, has argued that the rating agencies should begin by downgrading Britain. The finance minister, Francois Baroin, recently declared that, “You’d rather be French than British in economic terms.” And even the French Prime minister, Francois Fillar, noted that Britain had higher debt and larger deficits than France.

French officials apparently don’t recognize the importance of the fact that Britain ... has its own currency, which means that there is no risk that Britain will default on its debt. When interest and principal on British government debt come due, the British government can always create additional pounds to meet those obligations. By contrast,... the French central bank cannot create euros. ... That is why the market treats French bonds as riskier and demands a higher interest rate...

There is a second reason why the British situation is less risky than that of France. Britain can reduce its current-account deficit by causing the British pound to weaken relative to the dollar and the euro, which the French, again, cannot do without their own currency. Indeed, that is precisely what Britain has been doing with its monetary policy: bringing the sterling-euro and sterling-dollar exchange rates down to more competitive levels. ...

France should focus its attention on its domestic fiscal problems and the dire situation of its commercial banks, rather than lashing out at Britain...